How to Avoid Common Mistakes
When Buying Commercial General
Liability Insurance
Ten years ago, this report would not have been necessary, but times
have changed. Lawsuits happened just to the next guy. Insurance
policies were simple and life was wonderful…General Liability insurance
has changed drastically in the last few years and now there are “traps”
you need to be aware of … not intentional traps, but changes in the
industry that you have to keep abreast of. This brings us to the the
most common mistakes businesses make when shopping for their
general liability insurance. Don’t let them happen to you!
Mistake #1 - Occurrence vs. Claims Made Policies – Selecting
the wrong Policy Could Wipe out Your Life’s Savings
Construction claims made policies became popular in the mid 1980’s
and have been around ever since. The promise of these policies were
lower rates, but at what long-term damage? In some instances there
is no cost savings. Claims made policies for a contractor are the worst
possible policy you can buy. Let me explain: Claims made policies
allow you to make a claim on you policy only during the policy year as
the project is built. Contractors have claims down the road not in the
same year as the project is built.
If you want to leave that company and go to another company you will
have to purchase additional insurance to cover you for the next 10
years…that right 10 years! Why? Because the law allows customers to
file a lawsuit for construction problems up to 10 years after the project
was completed.
An Example:
You build a new room addition, everything goes well and you and your
customer are very happy with the final outcome…4 years later your
customer calls you and says that the roof is leaking and water comes
into the house and ruined his new $25,000 grand piano. He expects
you to repair the roof, the drywall, wallpaper, carpets and, of course,
replace the grand piano…
A claims-made will not allow you to file a claim 4 years later unless you
stayed with the same company the whole time. If you intend to shop
other companies after the claims made policy expires you must make a
decision, since you cannot make a claim against a claims made policy
after the policy expires unless you buy extended liability coverage
called a “tail.” The tail coverage extends the period of time you can
report a claim.
If you decide not to buy the “tail” you will not be able to report a claim
against the claims made policy. And to make matters worse, some
companies do not offer the 10-year extension.
When your policy comes up for renewal with a claims-made policy you
must decide.
· Do I leave the company and pay the additional insurance for
coverage for the next 10-year period or go without?
· Do I stay with the same company? Their prices on the new year may
stay the same or go up sharply.
· Do I switch to another company who has a better rates and
coverage?
This limits the marketplace for you, and makes it harder to accept a
better bid from another carrier. Claims made policies may work in
other lines of insurance, but for contractors they are a disaster. Take
time after reading this report to look for your policy and see if your
current policy is either an occurrence form or claims made…
Mistake #2 - Choosing a Poorly Rated Insurance Carrier -
Insurance Companies are given a grade, just think about the
grades you received in high school or college. A,B,C,D,F.
Insurance Companies are given a financial report card by the
A.M. Best Company.
An Insurance company with less than an “A” rating can be a potential
problem for two reasons. 1. There is a risk of the company going out
of business and 2. If you work for the state, county or city, they will
usually not accept any company less than an “A” rating. Also, if you
hire on as a subcontractor most general contractors will not accept any
rating less than an “A”. With some state government offices and
general contractors not accepting your liability insurance, you will be
limited to the type of jobs you can accept. If you do not know your
Company Rating feel free to call my office at any time, we will be glad
to look it up for you.
Mistake #3 - Unknown Policy Exclusions
First off lets get one thing clear…All policies have exclusions. You hear
terms like all risk, special form, comprehensive, full coverage. Those
phrases do not mean there are no exclusions. In a contractors general
liability policy all the exclusions are listed on the (DEC) front page of
the policy or on the second page of the policy. The problem is that
they are usually listed by form number, not by name. In order to make
sure you understand the policy. Then read it carefully and see if that is
a problem for the kind of work that you do. If you see a form number
on the front of the policy but you cannot find that form in the policy,
your policy is NOT COMPLETE! Someone forgot to add that form to the
policy when the policy was put together. People make mistakes!
The exclusions are critical. When you get a proposal for insurance the
first thing you should look for are the exclusions. For instance, if you
are a concrete contractor and you do house pads, if you have
exclusion for foundation work in your policy you have a problem. The
worse thing is you will not find your problem until you have a claim
and it is denied, by then it is too late.
Here is a list of exclusions I have found in many policies, this list is by
no means “all inclusive”. Look over this list and see what exclusions
would apply to your operation.
DESIGNATED WORK
Claims arising from any classification of class code listed on the
declaration page of this policy. For example: You are a roofing
contractor and you get a quote that is 50% less than all other quotes.
The policy comes in and your company is classified as a landscape
contractor. Any claims will be denied because you were not classed
correctly.
INDEPENDENT CONTRACTORS
Claims arising out of: the acts or omissions of independent while
working on behalf of an insured, or the negligent hiring or contracting,
investigation, supervision training, retention of any independent
contractor for whom any insured is or ever was legally responsible and
whose acts or omissions would be excluded. If you use subs, this
exclusion is a killer.
ASBESTOS
Not covered for exposures to asbestos, asbestos fiber, or any material
containing asbestos or asbestos products, including without limitation,
the cost of asbestos removal or damage in the cause of effecting such
removal.
PROFESSIONAL LIABILITY
Claims arising out of rendering of or failure to render any professional
services by you or any engineer, architect or surveyor who is either
employed by you to perform work on your behalf in such a capacity.
Professional services include: the preparing, approving, or failing to
prepare or approve. Maps, shop drawings, opinions, reports, surveys,
field reports, change order or drawings: and Supervisory, inspection,
architectural or engineering activities, For example, if you make a
structural change without the architects approval, there is no
coverage.
CONTRACTORS WARRANTY
This means that if you hire sub contractors, you must get
a certificate of insurance from them. If you do not, the amountof the
contract with the sub will be added to the payroll or gross receipts and
you will be charged, In other words you will pay for the subs general
liability. Some companies use a stricter version of this. They require
the sub to have the same limits of insurance as you do.
X.C.U.
Explosion, collapse, and underground.
If one of these exclusions, or other exclusions in your policy are a
problem for you, one of three things happened.
1. You did not tell your broker that you do this kind of work.
2. You did tell your broker and he was not listening
3. Your broker does not have enough knowledge about construction
insurance.
In any case call your broker and explain the problem and get it solved
before a claim occurs, if your broker can’t help you, find another
broker.
Mistake #4 - Acceptance - We touched upon this a little when
speaking of company ratings, but there are many reasons why
governments, general contractors and more and more, smart
homeowners who will not accept just any certificate of
insurance.
Certificates of insurance are not being accepted for the following:
· Additional Insured Endorsement (CG-2010) when is an additional
insured endorsement not an Additional Insured Endorsement? There
are many kinds of Endorsements with different language. The CG-2010
has become the Additional Insured Endorsement of choice. Many
general contractors will not accept any other certificate. You must be
very careful here, most companies now charge for these certificates
anywhere from $100-$1000 each. If the costs of these certificates are
not in you bid you’re losing money.
· Primary Endorsements-along with the above Additional Insured
Endorsement, many people are asking for primary endorsements, 99%
of all insurance companies have an additional charge for these as well,
mostly for $250-$1,000 each.
· Waiver of Subrogation – Another endorsement that has become
popular. This is seen more in Workers Comp but does not come up in
General Liability. There is an additional charge for this endorsement.
Mistake #5 – Subcontractors…This one is a potential killer
I have seen dozens of companies go out of business on this subject
alone within the past 10 years. It’s usually your best friend or
someone you were just trying to help out. When you hire a
subcontractor to do work for you, he must carry General Liability
Insurance and he must have the same limits of liability as you do. For
example, if you have a General Liability insurance policy with a
$1,000,000 limit the subcontractor that you hired must also have the
same.
What happens if your sub does not carry general liability? The problem
arises when your general liability company comes and audits your
books at the end of the year. If you do not have a Certificate of
Insurance for the sub your general liability company will add it to your
payroll and you end up paying the general liability for the sub
contractor who did not buy it.
I can hear you now…It’s not fair…fair or not, it’s in the insurance
contract. Let’s look at the insurance company’s side on this subject. If
there is a problem on the job, whom is the customer going to sue? He
is going to sue the subcontractor and General Contractor. The
insurance company has no recourse against the subcontractor and
must defend the entire lawsuit, while the subcontractor walks away.
Now, I do not expect you to have sympathy for an insurance company,
but, now you know how it works. Now you know why I call it the
KILLER that poses as a best friend. You feel sorry for them-And you
pay the price.
Mistake #6 - ADMITTED VS. NON ADMITTED COMPANIES
Admitted Companies are companies that are licensed in your State and
contributed to the Property & Casualty Security Fund (The Fund). The
fund is a pool of money set aside by the State. Most states have
programs where those who buy General Liability Insurance are
charged a percentage of his or her insurance premiums to go into a
pool. This pool of money is set aside to handle claims by people in the
State who’s Insurance Company cannot pay their claims. If there are
other companies to pick up the claim, The Fund will not share the
claim. Non-Admitted companies do not contribute to the Fund pool. If
a Non-Admitted company goes out of business you have no
recourse…Non-Admitted companies are not necessarily a bad deal.
They fill a gap in your state and provide competition for the Contractor
business. However, if you use a Non Admitted company with a bad
rating you might be asking for trouble.
The State Insurance Commissioner of your state has determined that
certain types of insurance are not available from admitted insurers and
has placed these types of insurance.
Mistake #7 - Choosing The Wrong Agent or Broker
As strange as this may seem, your biggest problem might be your
current insurance agent or broker. Not that he is not trying to do a
good job, but he does not handle the Construction Industry on a
dayto-day basis, he is out of touch with a marketplace that is changing
day to day. Keeping up with the Construction Industry is a full time
job.
Make sure your broker reviews your coverages and gets a package
that suits your business properly.
Now that you have learned 7 of the most common mistakes businesses
make when buying General Liability Insurance, contact our agency for
a free, no obligation quote. We will make sure you are well taken care
of in all aspects of your insurance.
